Consumers and Investors Confident even as Global Recession Threatens Anew

It’s been a most unusual - some say crazy - year for global stock markets, certainly including that of the U.S.

The global economic recovery from the 2007-2009 financial collapse stalled last year and continues to worsen this year, with the International Monetary Fund cutting its forecasts for global economic recovery yet again, including for the U.S., and warning four days ago that risks of the world dropping back into a global recession “are alarmingly high”, and that “no significant improvements appear in the offing.”

That certainly sounds like the IMF doesn’t have much confidence that the ‘Troika’ (the IMF, EU, and ECB) will be successful with the euro-zone rescue plans and stimulus measures announced a month ago.

Meanwhile the stock markets of China and Japan, the world’s second and third largest economies, are in serious bear markets due to their economic slowdowns and fears of the worsening global economic conditions. China’s stock market is down 40% from its peak in 2009. Japan’s market is down 22% from its 2010 peak and still 51% beneath its peak in 2007.

Clearly neither of those extremely important global economies have any more confidence than the IMF that improvements are in the offing.

U.S. corporations seem to be preparing for the possibility of unusually difficult times ahead. They have salted away a record $1.4 trillion in cash, refusing to invest it in their futures, earning near zero on it, the purpose for hoarding the cash rather than using it apparently being to make sure they can pay their bills and survive anything that might lie ahead.

The fear of corporate managements could also be seen in the way that corporate insiders did not agree with the optimism that created the big stock market rally off the June low. They sold into its strength at an unusually heavy pace. According to the latest Vickers Weekly Insider Report, their selling has continued even after the Fed announced its QE3 stimulus measures. Like the IMF, and China and Japan’s markets, they apparently have little confidence that the new rescue efforts by the ECB in Europe and the U.S. Fed, will produce economic improvement anytime soon.

Usually savvy hedge-fund managers likewise did not participate in the June rally, instead selling into it. According to the Wall Street Journal, that has them experiencing their worst year since 1997. The opinion of hedge fund Comstock Partners, revealed in a report this week, is that the economy and stock market face “severe headwinds in the period ahead”. It cites “the ongoing European sovereign debt crisis, significant slowing of growth in China and emerging markets, ongoing problems in Japan, an anemic U.S. recovery, dysfunction in Washington, the coming fiscal cliff, and the first decline in S&P 500 earnings in three years.” Its conclusion is that “while these problems are fairly well-known, they have not been factored into the market since investors have been focusing on other factors they regard as highly bullish.” They cite those factors as mainly being investor confidence that the Fed has their backs and “will prevent anything terrible from happening.”

Private-equity funds are having a similar under-performing year, up on average of only 4%. As the Journal says, that is not what their investors planned on. The funds were also suspicious of the rally, and are sitting on close to $1trillion in cash.

However, U.S. investors remain bullish and confident as evidenced by the resilience in the U.S. stock market. For instance, while China’s stock market is in a bear market and at a 4-year low, the S&P 500 reached a four-year high in mid-September, and has settled back less than 3% since.

That’s quite a contrast to the worsening worries of the IMF, China and Japan, U.S. corporations, company insiders, professional hedge fund and other institutional managers.

But it’s not just U.S. investors that are confident and bullish, but U.S. consumers as well.

The University of Michigan – Thomson Reuters Consumer Sentiment Index was released Friday. It shows that consumer confidence has jumped to 83.1 in October from 78.3 in September. That’s much better than forecasts that it would decline to 78.0.

And at 83.1, consumer confidence is getting close to the 87 level it averaged in the year prior to the 2008-2009 recession. That’s a lot more recovery than global economies have achieved, including that of the U.S.

Is it just due to the pixie dust being puffed out by Wall Street and the Fed, about to be blown away by the gathering storm others see coming.

Or has Main Street got it right this time, while the so-called ‘smart money’ is refusing to inhale the magic?